The Informal Economy Debate: Four Dominant Schools of Thought

Dualist School:
ILO World Employment Mission Kenya 1972

characterization of informal activities:
- autonomous activities with few (if any) links with the rest of the economy
- 7 widely-cited features:
  - ease of entry
  - reliance on indigenous resources
  - family ownership of enterprises
  - small scale of operations
  - labour-intensive and adapted technology
  - skills acquired outside the formal school system
  - unregulated and competitive markets
causal theory: exclusion from modern economic opportunities due to two imbalances – between:
- growth of population + growth of modern industrial employment
- people’s skills + structure of modern economic opportunities

focus: relationships of production
characterization of informal economy = specific form of relationships of production + unregulated by the institutions of society
- universal
- heterogeneous
- on the rise
- systemically linked to capitalist/formal firms
composition of informal economy = self-employed + wage employed
- petty artisans
- petty traders
- sub-contracted workers
- casual laborers
- informalized (i.e., once formal) wage workers
causal theory: informality due to nature of capitalism/capitalist growth -
- attempts by formal firms to
  - reduce labor costs
  - increase competitiveness
- reaction of formal firms to:
  - power of organized labor
  - state regulation of the economy, notably taxes + social legislation
  - global competition
- process of industrialization: notably, off-shore industries + sub-contracting chains + flexible specialization

focus: rural-to-urban migrants in Lima, Peru
causal theory: hostile reception, especially from the legal system, leads to
- informal activities
- extralegal norms
costs of formalization:
- costs of becoming formal: registration + license
- costs of remaining formal: taxes + compliance with regulations/laws + higher rates for public utilities
costs of informality:
- costs of illegality: to economy of…
  - avoidance of fees and penalties
  - avoidance of taxes and labour laws
- costs of absence of good law: to informal workers
  - not having property rights
  - not having enforceable contracts
  - not receiving benefits from formal sector

focus: self-employed, notably micro-entrepreneurs + especially male micro-entrepreneurs
causal theory: informal sector is “voluntary”: i.e., micro-entrepreneurs choose to operate informally – after weighing costs-benefits of formality vs. informality
costs of formality: payroll taxes and social protection contributions
benefits of informality: way to earn income while avoiding costs of formality